Whether you love making budget sheets each month or you're the kind of person who'd rather stick their head in the sand than have a conversation about debt, money has an impact on just about every area of your life. As frustrating as that may be for people who think they just aren't 'good' with money, the good news is that the number one tool for changing that mentality is totally at your disposal: knowledge.
Some methods of gaining an understanding about money look very boring indeed but there are plenty of educators out there now who understand that reading the financial pages of a fusty broadsheet ain't gonna cut it for those of us paying 60% of our salary to live in a box room above a fast food place.
Money Medics is headed up by Ashley, her sister-in-law Eve and brother Nicholas. The money management Instagram account, podcast (latest ep: "Being A Bridesmaid Landed Me In Debt." Sound relatable?), YouTube channel and newsletter are packed full of easy-to-digest info aimed specifically at young people who want to get a grip on their finances.
So when we got the chance to ask Eve and Ashley a few of your money questions, we couldn't hold back. Read on to find out about the logistics of buying a house with a smaller deposit.
I’m single and for a long time I assumed that buying a house was just out of my reach or something I’d have to wait to do until I met someone (someone wealthy) but since the government introduced its 95% mortgage thing I’ve been thinking it sounds a bit more doable. Where I live, a one-bedroom flat is around £250k and getting together a 5% deposit of £12,500 is actually within my reach by the end of next year. My question is though, is it really that simple? For so long, house buying has been out of my reach and now it’s just...not? What should I be considering before I go down this road? And are there any hidden pitfalls I should be looking out for?
Money Medics: First of all, that's a fantastic mindset shift. We hear so much on social media that buying a home is impossible for the younger generation and it's great that you've looked into ways to make this possible for you.
However, it's important to note that the deposit is not the only thing you need to save for. Fortunately, the deposit is usually the most expensive part and you’ve already got that covered, so let’s move on to the rest!
Now let's start with things to consider before you start your property hunt.
How much will the banks lend you?
You cover the deposit so the mortgage lender should cover the rest, however, the amount they lend you depends on your income and current debt levels. They tend to give 4.5x your annual earnings.
Let’s use the £250,000 flat as a working example.
£250,000 - £12,500 (your deposit) = £237,500 < that the bank needs to lend you.
So you’ll need to earn around £53,000 a year in order for the banks to lend what you need but if you have any debt the amount they can lend may be even less.
If that salary multiple is an issue, then you can consider options like the Help to Buy government equity loan. With government assistance, you may only need 75% of the property price from the banks, rather than 95%.
Speak to a mortgage advisor for insider knowledge on which banks will lend you the most money, as well as the pros and cons of the Help to Buy equity loan.
Have you checked your credit score?
A mortgage may well be the largest amount you ever ask to borrow so the mortgage lenders need to know if you have a reputable history of paying money back on time. This is what your credit score indicates. Now is a great time to check your credit score using apps such as Experian, ClearScore and Credit Karma. It’s best to check sooner rather than later as if your score is lower than you expected, you’ll need to give yourself time to improve it. You can improve it by signing up to the electoral roll, ensuring you only use less than 30% of your credit card limit or even using credit builder apps like Portify and Loqbox.
What other things do you need to save for?
Once you’ve picked your home, it’s time to sort out your mortgage and the legal aspects too. These also have their own costs to consider.
Mortgage arrangement fee. This is the fee lenders charge for setting up the loan and can cost around £1,000.
Legal fees – budget around £1,000-1,500. This includes the costs of the solicitor/conveyancer transferring the legal ownership over to you.
Survey fees – a survey is an inspection of the property's condition and can range from £250-£600 depending on the detail required.
Stamp duty – a tax you pay upon purchasing a home. Luckily you won’t have to pay as a first-time buyer for your £250,000 home but the laws are constantly changing so you should look this up when you’re ready to buy.
Altogether, your expenses may be an additional £2,250-3,100.
You could consider a Lifetime ISA for additional cash towards expenses as you can earn up to £1,000 per year in government bonuses.
There are also considerations after you purchase your property. This varies greatly from person to person, such as furniture, maintenance and repair cost.
Overall, yes, buying a home comes with many hidden costs and expenses; however, in most cases, the pros of having a generally appreciating asset far outweigh the cons.
This piece was amended on 21/08 to take into account the additional administrative fees that will also likely be required under 'legal fees'.